What is the 1% rule in trading?
The 1% rule means you never risk more than 1% of your account on a single trade. Risk is the amount you lose if your stop is hit, not the size of the position.
The rule is about survival. Losing streaks happen to every trader. At 1% risk, ten losses in a row cost about 10% of the account — painful but recoverable. At 10% risk, the same streak can wipe the account out.
To apply it, work backwards from your stop. Hypothetical example: a $25,000 account × 1% = $250 maximum loss. You plan to buy at $50.00 with a stop at $49.00, so you risk $1.00 per share. $250 ÷ $1.00 = 250 shares maximum.
If the target is $52.50, the reward is $2.50 per share, or 2.5 times the risk (2.5R). Many traders skip trades where the reward is less than twice the risk.
Remember that fast stocks can gap or slip past your stop, especially penny stocks and around halts, so the real loss can exceed the plan. Many small-cap traders size below 1% for that reason.
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